Toward the Realization of Equal Pay for Equal Work

In the run-up for the Ise-Shima G7 summit to be held in May 2016 in Mie prefecture, the government will be fleshing out various policy packages. Some important clues to the content or direction of policy measures in the making can be found in Prime Minister Shinzo Abe's policy speech before the Diet in January 2016. As a measure toward realizing the "dynamic engagement of all citizens" which is the primary goal of his government, he cited, first and foremost, working style reform to allow for diverse ways of working. Particularly, it came as a big surprise that he pledged to include measures designed to achieve "equal pay for equal work" in a plan to realize the dynamic engagement of all citizens to be compiled in May 2016.

More specific comments and instructions came on February 23, 2016 at the meeting of the National Council for Promoting the Dynamic Engagement of All Citizens. For instance, as toward realizing equal pay for equal work, he stated that the government will: 1) move forward without hesitation to prepare for necessary legal revisions while giving due consideration to the customary employment practice in Japan; 2) establish guidelines to illustrate what kinds of wage gaps would be considered to be unjustifiable; and 3) set up a forum of experts to examine and gain better understanding of the operation of relevant laws in Europe.

Such an explicit commitment to the kind of policies that a series of previous governments had avoided addressing shows the extraordinary determination of Abe and his government, considering the fact that the discussions at the council have been centered on budgetary measures for childcare and nursing care support. In what follows, I would like to explain the basic ideas concerning the concept of equal pay for equal work that has suddenly become the top priority policy issue for the Abe government.

What is "equal pay for equal work" in the first place?

A comparison of wage levels between "regular" workers (i.e., those in permanent full-time employment) and "non-regular" workers (e.g., part-timers, fixed-term contract workers, temporary agency workers) points to the undeniable fact that significant gaps exist between the two groups. The average wage per hour for non-regular workers is about 67% of that for regular workers in the age group 35-39 but only about 49% in the age group 50-54, indicating that the wage gap tends to become larger with an increase in age (see the Ministry of Health, Labour and Welfare's Basic Survey on Wage Structure). Needless to say, it is no wonder that regular and non-regular workers have different wage levels if they engage in different types of jobs. Meanwhile, equal pay for equal work is a principle that calls for applying the same level of remuneration to individuals doing the same work. However, this principle is not necessarily correct from the perspective of economics.

For example, consider wages for part-time and full-time workers in permanent employment. From the viewpoint of employers, the total cost of labor is not necessarily proportional to the number hours worked because a certain amount of fixed costs (i.e., costs of hiring and discharge, fringe benefits not based on the number of hours worked) is incurred for each worker hired. Therefore, it is considered that employers are inclined to set lower wages for part-time workers than for their full-time counterparts because of the relatively high fixed costs involved in their employment.

Meanwhile, some workers—such as students who need to divide their time between work and study, married women with major household responsibilities, and elderly persons physically unfit to work full time—prefer working part time rather than full time and thus accept lower wages. In other words, we can rationally explain lower wage levels for part-time workers than those for their full-time workers doing the same work. More generally, we need to look at various relevant factors—including wages, fringe benefits, the nature and content of work, and working styles—as a package, rather than focusing solely on wage inequalities. An important perspective in this regard is that treatment in terms of an entire package should be equal (compensation wage theory).

The most problematic from this standpoint is the case of non-permanent workers, i.e., those working on fixed-term contracts. According to the above compensation wage theory, non-permanent workers should receive higher wages than permanent workers doing the same job because they should deserve a premium in compensation for job insecurity. However, empirical findings in Japan and overseas show that non-permanent workers are earning less than their permanent worker counterparts even when workers' attributes are controlled for to some extent. Thus, what is important from the perspective of policy making is to address wage gaps that cannot be explained rationally or a situation where the treatment of workers as a package of various factors is deemed to be out of balance, rather than seeking to achieve equal pay for equal work simple-mindedly.

Direction of specific policy measures in the pipeline

A presentation made by University of Tokyo Professor Yuichiro Mizumachi, a leading expert on this issue, at the February 23, 2016 meeting of the National Council for Promoting the Dynamic Engagement of All Citizens (Note 1) is suggestive of the direction of specific policy measures to be fleshed out in the coming months. Mizumachi is a long-time member of a RIETI research project on the reform of labor market and has been serving as an expert member of the Regulatory Reform Council's working group on employment.

Specific points that need to be addressed include the following. First, while Article 20 of the Labor Contract Act and Article 8 of the Act on Improvement, etc. of Employment Management for Part-Time Workers prohibit unreasonable differences in labor conditions and treatment between regular workers and non-regular workers covered by the respective laws, the text of those provisions is not necessarily clear about what constitutes prohibited inequalities. It is thus necessary to clarify the provisions to explicitly state that the disadvantageous treatment of fixed-contract workers and part-timers is prohibited as a general rule, except when there are rational reasons to justify such treatment. Second, it should be made clear that employers are accountable for any differences in treatment by providing rational reasons. Third, the Act for Securing the Proper Operation of Worker Dispatching Undertakings and Improved Working Conditions for Dispatched Workers should be revised to include provisions that explicitly prohibit the disadvantageous treatment of temporary agency workers without rational reasons. Fourth, the government should establish guidelines to define what would constitute rational reasons, etc. for differences in the treatment of workers and thereby to promote labor and management efforts to improve labor conditions for workers suffering from unfair treatment. How to define differences in various conditions—such as duties and responsibilities, education and qualifications, the length of service and work experience, the length of work hours and number of hours worked and the types of assignments, and the possibility of continuing to work in the future—will be the next point of contention.

Research Institute of Economy, Trade and Industry, IAA (JCN 6010005005426)JCN: Japan Corporate Number

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